Recent Posts

A recent
paper by Aurthur J. O'Connor and Famecount looked at 30 top
brands from June 2010 through June 2011, and found that number of
Facebook
fans was correlated with the stock price.

Looking at the charts below, I can see how it's pretty
significant.

You can't see these graphs very well, but the vertical axes are
price, the horizontal are Facebook fans.

In my 1994 dissertation I found that if I counted up stories in
Nexus, these stories counts explained the relative ownership
percentage of mutual funds in regressions that included price,
size, and volatility. That is, in the context of these other
variables, stocks more frequently in the new tended to have
larger mutual fund ownership. One could imagine fund being both
more aware of these companies, and having an easier time
explaining their ownership in these companies.

Contemporaneous correlations are one thing, predictions another.
Stocks with higher volatility generate more news than less
volatile firms. Such stocks are then ‘in play’, and so become
relevant to the investor interested in deviating from the index.
Further, they create a default value, in that once everyone
seemed to have internet stock in their portfolio, or some
exposure to residential real estate, it seemed prudent to also
have some, especially if one were indifferent.

Given short constraints and overconfidence, this increased focus
on volatile stocks leads to lower future returns. I imagine this
might be interesting to look at whether this is more useful as a
short-term momentum indicator, or a longer-term mean-reverting
signal. The trick for the longer term predictability, is that you
need a survivorship bias free data set with historical data going
back several years, so I doubt that Facebook or Twitter
have enough data to test anything with a horizon greater than
1-week.